US: Consumer Price Index

Wed Dec 13 07:30:00 CST 2017

Consensus Consensus Range Actual Previous
CPI - M/M change 0.4% 0.2% to 0.5% 0.4% 0.1%
CPI - Y/Y change 2.2% 2.0% to 2.3% 2.2% 2.0%
CPI less food & energy- M/M change 0.2% 0.2% to 0.3% 0.1% 0.2%
CPI less food & energy - Y/Y change 1.8% 1.8% to 2.0% 1.7% 1.8%

Higher gasoline prices gave a superficial boost to the CPI headline which managed to meet expectations with a 0.4 percent November gain yet when excluding energy and also food, the core comes up 1 tenth short of Econoday's consensus and inched only 0.1 percent higher. A sharp 1.9 percent monthly drop in apparel pulled down the core and also offers strong evidence of holiday discounting which hints at weakness for tomorrow's retail sales report.

But apparel wasn't the only component pulling November's core down as medical care came in unchanged in the month and housing, which represents by far the biggest share of the CPI, slowed by 1 tenth with only a 0.2 percent increase (owners' equivalent rent sub-component also up only 0.2 percent). Two other readings of note are wireless services, which were weak early in the year but have since been rebounding including a 0.3 percent rise in November, and prescription drugs which have shown more recent weakness much of which is now reversed with a 0.6 percent gain.

Gasoline prices surged 7.3 percent last month but, in what points to headline weakness for the December CPI, have since been on the retreat. Food prices were also no help to the headline, coming in unchanged with only a 1.4 percent year-on-year rate.

The overall year-on-year rate did rise 2 tenths but is still soft at only 2.2 percent while the core rate edged lower to a frustratingly low 1.7 percent. Inflation is just lying around, not getting much push from wages in what is an increasing anomaly of this expansion. Yet however soft inflation remains, the labor market appears to be at full employment which gives Federal Reserve policy makers little choice but to raise rates at today's FOMC.

Market Consensus Before Announcement
Aside from hurricane-related swings, consumer inflation has been fundamentally flat including October when the monthly rate rose only 0.1 percent while the year-on-year rate fell 2 tenths to 2.0 percent. The core, which excludes food and energy, rose 0.2 percent with this yearly rate inching up 1 tenth to 1.8 percent. Wireless service prices, which have fallen steeply this year, have been rebounding in recent months but have been offset by weak prices for vehicles. For November, forecasters see the overall CPI rising 0.4 percent with the less food & energy rate at 0.2 percent. Year-on-year, the CPI is seen rising 2.2 percent with the core at 1.8 percent.

The Consumer Price Index is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. That is the index shows the change in price levels since the index base period, currently 1982-84 = 100. Monthly changes in the CPI represent the rate of inflation.

The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group, representing about 87 percent of the population. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.

The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.

The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.

The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

The consumer price index is the most widely followed monthly indicator of inflation. The CPI is considered a cost-of-living measure since it is used to adjust contracts of all types that are tied to inflation. Labor contracts are tied to changes in the CPI; Social Security payments are tied to the CPI; and even tax brackets are tied to the consumer price index.

For monetary policy, the Federal Reserve generally follows "headline" and "core" inflation. This latter measure excludes the volatile food and energy components. The Fed's preferred inflation measure is not the CPI but the personal consumption price index because it reflects what consumers are actually buying during any given period-the component weights are updated annually while those for the CPI are updated infrequently. However, the subcomponent price data of the CPI are used to compile the PCE price index (PCE prices are released almost two weeks after the CPI). Thus, the CPI and the PCE price index are inextricably linked. In the long run, the overall CPI and core CPI track each other.

The bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Economic data tend to be volatile from month to month; the CPI is no exception. Large fluctuations in the consumer price index are often due to the food and energy components. Weather conditions affect both to a large extent. OPEC, the oil cartel, also affects energy prices. As a result, economists and financial market participants prefer to monitor the CPI excluding food and energy prices for its greater monthly stability. This is also referred to as the "core" CPI. Oddly enough, items that make part of the "core" also include discretionary goods and services. And while food and energy prices are excluded because of their monthly volatility, what can be more "core" than food and energy? Food and energy prices account for a little more than one-fifth of the CPI.

The consumer price index has evolved over time as consumer expenditures changed. Commodities now make up only 40 percent of the index and the remaining 60 percent are services. It is useful to monitor goods and services separately since prices of goods are more volatile than prices of services.

Usually, when investors refer to the real rate of interest, they use the year-over-year rise in the CPI to subtract from an interest rate, such as the 10-year Treasury note.